Which of the following prevents potential competitors from entering a monopolized market?

The antitrust laws prohibit conduct by a single firm that unreasonably restrains competition by creating or maintaining monopoly power. Most Section 2 claims involve the conduct of a firm with a leading market position, although Section 2 of the Sherman Act also bans attempts to monopolize and conspiracies to monopolize. As a first step, courts ask if the firm has "monopoly power" in any market. This requires in-depth study of the products sold by the leading firm, and any alternative products consumers may turn to if the firm attempted to raise prices. Then courts ask if that leading position was gained or maintained through improper conduct—that is, something other than merely having a better product, superior management or historic accident. Here courts evaluate the anticompetitive effects of the conduct and its procompetitive justifications.

Market Power

Courts do not require a literal monopoly before applying rules for single firm conduct; that term is used as shorthand for a firm with significant and durable market power — that is, the long term ability to raise price or exclude competitors. That is how that term is used here: a "monopolist" is a firm with significant and durable market power. Courts look at the firm's market share, but typically do not find monopoly power if the firm (or a group of firms acting in concert) has less than 50 percent of the sales of a particular product or service within a certain geographic area. Some courts have required much higher percentages. In addition, that leading position must be sustainable over time: if competitive forces or the entry of new firms could discipline the conduct of the leading firm, courts are unlikely to find that the firm has lasting market power.

Exclusionary Conduct

Judging the conduct of an alleged monopolist requires an in-depth analysis of the market and the means used to achieve or maintain the monopoly. Obtaining a monopoly by superior products, innovation, or business acumen is legal; however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns.

Exclusionary or predatory acts may include such things as exclusive supply or purchase agreements; tying; predatory pricing; or refusal to deal. These topics are discussed in separate Fact Sheets for Single Firm Conduct.

Business Justification

Finally, the monopolist may have a legitimate business justification for behaving in a way that prevents other firms from succeeding in the marketplace. For instance, the monopolist may be competing on the merits in a way that benefits consumers through greater efficiency or a unique set of products or services. In the end, courts will decide whether the monopolist's success is due to "the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident."

Example: The Microsoft Case

Microsoft was found to have a monopoly over operating systems software for IBM-compatible personal computers. Microsoft was able to use its dominant position in the operating systems market to exclude other software developers and prevent computer makers from installing non-Microsoft browser software to run with Microsoft's operating system software. Specifically, Microsoft illegally maintained its operating systems monopoly by including Internet Explorer, the Microsoft Internet browser, with every copy of its Windows operating system software sold to computer makers, and making it technically difficult not to use its browser or to use a non-Microsoft browser. Microsoft also granted free licenses or rebates to use its software, which discouraged other software developers from promoting a non-Microsoft browser or developing other software based on that browser. These actions hampered efforts by computer makers to use or promote competing browsers, and discouraged the development of add-on software that was compatible with non-Microsoft browsers. The court found that, although Microsoft did not tie up all ways of competing, its actions did prevent rivals from using the lowest-cost means of taking market share away from Microsoft. To settle the case, Microsoft agreed to end certain conduct that was preventing the development of competing browser software.

What Is Monopolistic Competition?

Monopolistic competition exists when many companies offer competing products or services that are similar, but not perfect, substitutes.

The barriers to entry in a monopolistic competitive industry are low, and the decisions of any one firm do not directly affect its competitors. The competing companies differentiate themselves based on pricing and marketing decisions.

Key Takeaways

• Monopolistic competition occurs when many companies offer products that are similar but not identical.
• Firms in monopolistic competition differentiate their products through pricing and marketing strategies.
• Barriers to entry, or the costs or other obstacles that prevent new competitors from entering an industry, are low in monopolistic competition.

Monopolistic Competition

Understanding Monopolistic Competition

Monopolistic competition exists between a monopoly and perfect competition, combines elements of each, and includes companies with similar, but not identical, product offerings.

Restaurants, hair salons, household items, and clothing are examples of industries with monopolistic competition. Items like dish soap or hamburgers are sold, marketed, and priced by many competing companies.

Demand is highly elastic for goods and services of the competing companies and pricing is often a key strategy for these competitors. One company may opt to lower prices and sacrifice a higher profit margin, hoping for higher sales. Another may raise its price and use packaging or marketing that suggests better quality or sophistication.

Companies often use distinct marketing strategies and branding to distinguish their products. Because the products all serve the same purpose, the average consumer often does not know the precise differences between the various products, or how to determine what a fair price may be.

Characteristics of Monopolistic Competition

Low Barriers to Entry

In monopolistic competition, one firm does not monopolize the market and multiple companies can enter the market and all can compete for a market share. Companies do not need to consider how their decisions influence competitors so each firm can operate without fear of raising competition.

Product Differentiation

Competing companies differentiate their similar products with distinct marketing strategies, brand names, and different quality levels. 

Pricing

Companies in monopolistic competition act as price makers and set prices for goods and services. Firms in monopolistic competition can raise or lower prices without inciting a price war, often found in oligopolies.

Demand Elasticity

Demand is highly elastic in monopolistic competition and very responsive to price changes. Consumers will change from one brand name to another for items like laundry detergent based solely on price increases.

Advantages and Disadvantages of Monopolistic Competition

Monopolistic competition provides both benefits and pitfalls for companies and consumers.

Pros

• Few barriers to entry for new companies

• Variety of choices for consumers

• Company decision-making power for prices and marketing 

• Consistent quality of product for consumers

Cons

• Many competitors limits access to economies of scale

• Inefficient company spending on marketing, packaging and advertising

• Too many choices for consumers means extra research for consumers

• Misleading advertising or imperfect information for consumers

What Is the Difference Between Monopolistic Competition and Perfect Competition?

In perfect competition, the product offered by competitors is the same item. If one competitor increases its price, it will lose all of its market share to the other companies based on market supply and demand forces, where prices are not set by companies and sellers accept the pricing determined by market activity.

In monopolistic competition, supply and demand forces do not dictate pricing. Firms are selling similar, yet distinct products, so firms determine the pricing. Product differentiation is the key feature of monopolistic competition, where products are marketed by quality or brand. Demand is highly elastic, and any change in pricing can cause demand to shift from one competitor to another.

How Does Monopolistic Competition Function in the Short Term and Long Term?

Companies aim to produce a quantity where marginal revenue equals marginal cost to maximize profit or minimize losses. When existing firms are making a profit, new firms will enter the market. The demand curve and the marginal revenue curve shift and new firms stop entering when all firms are making zero profit in the long run. If existing firms are incurring a loss, some firms will exit the market. The firms stop exiting the market until all firms start making zero profit. The market is at equilibrium in the long run only when there is no further exit or entry in the market or when all firms make zero profit in the long run.

What Industry Is an Example of Monopolistic Competition?

Monopolistic competition is present in restaurants like Burger King and McDonald's. Both are fast food chains that target a similar market and offer similar products and services. These two companies are actively competing with one another, and seek to differentiate themselves through brand recognition, price, and by offering different food and drink packages.

What Is the Difference Between Monopolistic Competition and a Monopoly?

A monopoly is when a single company dominates an industry and can set prices for its product without fear of competition. Monopolies limit consumer choices and control production quantity and quality. Monopolistic competitive companies must compete with others, restricting their ability to substantially raise prices without affecting demand and providing a range of product choices for consumers. Monopolistic competition is more common than monopolies, which are discouraged in free-market nations.

The Bottom Line

Monopolistic competition exists when many companies offer competitive products or services that are similar, but not exact, substitutes. Hair salons and clothing are examples of industries with monopolistic competition. Pricing and marketing are key strategies for competing companies and often rely on branding or discount pricing strategies to increase market share.

What prevents potential competitors from entering a monopolized market?

Which of the following describes a monopolized market structure?

Which of the following describes a monopolized market structure quizlet?

How does a monopoly restrict competition?